Those differences may make it more attractive for some businesses to enter, say, Brazil than India. Companies often base their globalization strategies on country rankings, but on most lists, it is impossible to tell developing countries apart. According to the six indices below, Brazil, India, and China share similar markets while Russia, though an outlier on many parameters, is comparable to the other nations.
Contrary to what these rankings suggest, however, the market infrastructure in each of these countries varies widely, and companies need to deploy very different strategies to succeed. As we helped companies think through their globalization strategies, we came up with a simple conceptual device—the five contexts framework—that lets executives map the institutional contexts of any country. Economics tells us that companies buy inputs in the product, labor, and capital markets and sell their outputs in the products raw materials and finished goods or services market.
This will help them understand the differences between home markets and those in developing countries. The five contexts framework places a superstructure of key markets on a base of sociopolitical choices. Many multinational corporations look at either the macro factors the degree of openness and the sociopolitical atmosphere or some of the market factors, but few pay attention to both. Managers can identify the institutional voids in any country by asking a series of questions. Are there strong political groups that oppose the ruling party?
Do elections take place regularly? Are the roles of the legislative, executive, and judiciary clearly defined? What is the distribution of power between the central, state, and city governments? Is the judiciary independent? Do the courts adjudicate disputes and enforce contracts in a timely and impartial manner? How effective are the quasi-judicial regulatory institutions that set and enforce rules for business activities? Do religious, linguistic, regional, and ethnic groups coexist peacefully, or are there tensions between them? How vibrant and independent is the media?
Are newspapers and magazines neutral, or do they represent sectar-ian interests? Are nongovernmental organizations, civil rights groups, and environmental groups active in the country? Do citizens trust companies and individuals from some parts of the world more than others? What restrictions does the government place on foreign investment? Are those restrictions in place to facilitate the growth of domestic companies, to protect state monopolies, or because people are suspicious of multinationals?
Can a company make greenfield investments and acquire local companies, or can it only break into the market by entering into joint ventures? Will that company be free to choose partners based purely on economic considerations? Does the country allow the presence of foreign intermediaries such as market research and advertising firms, retailers, media companies, banks, insurance companies, venture capital firms, auditing firms, management consulting firms, and educational institutions?
How long does it take to start a new venture in the country? Are there restrictions on portfolio investments by overseas companies or on dividend repatriation by multinationals? Does the market drive exchange rates, or does the government control them? Can a company set up its business anywhere in the country? Has the country signed free-trade agreements with other nations?
If so, do those agreements favor investments by companies from some parts of the world over others? Does the government allow foreign executives to enter and leave the country freely? How difficult is it to get work permits for managers and engineers? Does the country allow its citizens to travel abroad freely? Can ideas flow into the country unrestricted? Are people permitted to debate and accept those ideas? Can companies easily obtain reliable data on customer tastes and purchase behaviors? Are there cultural barriers to market research?
Do world-class market research firms operate in the country? Can consumers easily obtain unbiased information on the quality of the goods and services they want to buy? Are there independent consumer organizations and publications that provide such information? Can companies access raw materials and components of good quality? Is there a deep network of suppliers?
Can companies enforce contracts with suppliers? How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations? Do large retail chains exist in the country? If so, do they cover the entire country or only the major cities?
Do they reach all consumers or only wealthy ones? Are there other types of distribution channels, such as direct-to-consumer channels and discount retail channels, that deliver products to customers? Do consumers use credit cards, or does cash dominate transactions?
Can consumers get credit to make purchases? Are data on customer creditworthiness available? What recourse do consumers have against false claims by companies or defective products and services? How do companies deliver after-sales service to consumers? Is it possible to set up a nationwide service network? Are third-party service providers reliable? Are consumers willing to try new products and services?
Do they trust goods from local companies? How about from foreign companies? What kind of product-related environmental and safety regulations are in place? How do the authorities enforce those regulations? Does it have a good elementary and secondary education system as well? Do people study and do business in English or in another international language, or do they mainly speak a local language?
Can employees move easily from one company to another? Does the local culture support that movement? Do recruitment agencies facilitate executive mobility? What are the major postrecruitment-training needs of the people that multinationals hire locally? Is pay for performance a standard practice? How much weight do executives give seniority, as opposed to merit, in making promotion decisions? Would a company be able to enforce employment contracts with senior executives? Could it protect itself against executives who leave the firm and then compete against it?
Could it stop employees from stealing trade secrets and intellectual property? Does the local culture accept foreign managers? Do the laws allow a firm to transfer locally hired people to another country? Do managers want to stay or leave the nation? How are the rights of workers protected? Are financial institutions managed well? Is their decision making transparent? Do noneconomic considerations, such as family ties, influence their investment decisions?
Can companies raise large amounts of equity capital in the stock market? Is there a market for corporate debt? Does a venture capital industry exist? If so, does it allow individuals with good ideas to raise funds? How reliable are sources of information on company performance? Do the accounting standards and disclosure regulations permit investors and creditors to monitor company management?
Do independent financial analysts, rating agencies, and the media offer unbiased information on companies? How effective are corporate governance norms and standards at protecting shareholder interests? Do the laws permit companies to engage in hostile takeovers? Can shareholders organize themselves to remove entrenched managers through proxy fights? Is there an orderly bankruptcy process that balances the interests of owners, creditors, and other stakeholders? In socialist societies like China, for instance, workers cannot form independent trade unions in the labor market, which affects wage levels.
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Journal of the European Economic Association, 16 1 : Successful businesses look for those institutional voids and work around them. This ratio contrasts with the considerably higher ratios observed in other advanced economies for example, in the EU, USA and UK, the ratio is around , and inhabitants per branch, respectively. The consolidation process by altering them has also a number of implications in the conduct of monetary policy. Maredza, A.
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Digitalisation, globalisation and demographic change are having a far-reaching impact on the economy. In this setting, a functioning financial system is a key catalyst — to finance innovation, support competition, help insure against risks and — at a very basic level — secure payment systems. Yet one thing that is often overlooked is that the financial system itself is affected by structural change.
Digitalisation and technological change affect core functions of financial intermediaries — gathering and preparing information and ultimately fostering growth and stability. At the same time, the competitive conditions in the financial system itself are changing. New providers are entering the market, existing business models are being questioned or rendered obsolete.
More competition can ultimately lead to greater efficiency. But more competition in the financial sector can also have side effects and destabilise the markets. Structural change in the banking sector throws up a whole host of questions. Has market concentration increased and is there less competition? What impact does this have on financial stability? Are these trends being influenced by regulation? Are uncompetitive banks exiting the market? How effective is macroprudential policy? How can policymakers support structural change in the financial system — in the banking sector, for example — without jeopardising the efficiency and stability of the financial system?
What do the new technologies mean for the trade-off between efficiency and stability? To many of these questions, there is no conclusive answer. Not least of all, we need good theoretical and empirical research to better understand these interrelationships. At the same time, the financial system itself is undergoing a structural change.
In the past, phases of deregulation in which markets were opened up were always followed by phases in which the markets were protected by capital controls and other regulation, and competition was thus suppressed Rajan and Zingales Often, spells of isolationism were triggered by financial crises and the associated recessions Kaminsky and Reinhart Periods of isolationism cast long shadows.
It was only in the s that the previously heavily regulated banking systems of the United States and Europe were gradually opened up and liberalised. Restrictions on regional activity were lifted; cross-border business was made possible. The Second Banking Directive of opened up capital markets across European countries. Empirical studies for the United States give an indication of how these changes have affected risk in the banking sector. This shows that bank profitability can provide only limited information about the stability of a financial system.
A low or declining return on capital can, for example, reflect fierce competition. If weaker banks fail to exit the market, this supports high risk-taking overall. However, low profitability can also be a reflection of high capital levels at institutions. The implications for competition and stability can vary depending on which of these drivers dominates. The efficiency of banks has barely changed in the past few decades Phillipon In the United States, the costs of financial intermediation have remained broadly constant throughout the past years, at around 1.
The situation in Europe is similar in that, as a rule, the costs of intermediation did not fall between and Bazot Since the s, the pace of deregulation has picked up. On the one hand, this has given banks the ability to tap new markets and business lines. On the other hand, this deregulation may have turned out to be something of a boomerang. The fact that negative consequences for financial stability could emerge was underestimated.
Post-crisis developments in the financial sector have been shaped by interactions between the existing framework conditions, long-term trends in the financial system, macroeconomic and financial shocks and, not least, policy responses to these. The financial crisis ultimately revealed predetermined breaking points in the international financial system Rajan ; implicit government guarantees materialised.
In Germany alone, spending on support measures for banks was higher than spending on European rescue programmes — as measured by the effects on the debt level Federal Ministry of Finance It quickly became clear that the financial crisis was not just a liquidity crisis, but that many banks and financial systems were affected structurally and had to combat solvency problems. At the macroeconomic level, several shocks interacted in the crisis, triggering a macroeconomic crisis, which led to a decline in demand for credit and, in some regions, a sovereign debt crisis German Council of Economic Experts , Shambaugh The structural conditions and degree of competition in the financial system have a decisive influence over how banks adapt to the new setting.
Even before the crisis, some banking systems already displayed weaknesses in terms of capitalisation and profitability. The post-crisis adjustments therefore varied fairly widely. Others were less affected by the crisis developments, had sufficient capital buffers, and seized the opportunity to expand into new markets. Policy responses were shaped, on the one hand, by the acute pressure to act in the crisis and, on the other, by the institutional options for dealing with banks in distress. Regardless of which individual route was taken, the choices policymakers made back then are still shaping the competitive structure in the banking sector today.
At the international level, the G20 leaders agreed on a comprehensive set of reforms in with the objective of making the financial system more resilient. One of the new requirements was for banks to hold more capital to render themselves more crisis-proof. The newly established field of macroprudential policy put the regulatory objective of safeguarding financial stability at centre stage. In Germany, the Bundesbank plays an important role in this.
At the end of the day, many of the reforms that were adopted and implemented have a direct or indirect impact on the competitive situation in the financial system. For instance, higher capital requirements for credit institutions shift market shares towards well-capitalised institutions. Reforms designed to reduce misincentives at big banks also affect competitive structures. Fewer implicit government guarantees for big banks and additional capital requirements for systemically important institutions correct existing competitive distortions.
For these measures to be effective, it must be possible even for major institutions to exit the market, just as in any other sector. Another objective of the reforms, namely to transform the shadow banking system into a resilient, market-based funding system, changes the nature of competition through non-banks. Global developments intensify the pressure to make adjustments. The question of how changes in international markets, global value chains and protectionist measures will affect the activities and stability of banks is still largely unresolved. And the development of macroeconomic framework conditions will play a role in the future structures of the financial system.
Last but not least, the normalisation of monetary policy will have implications for financial institutions. The German financial sector is heavily shaped by banks.